In Problem 3, Suppose Albert, a Typical Citizen, Has the Utility

question 21

Multiple Choice

In Problem 3, suppose Albert, a typical citizen, has the utility function U(m, d, h) = m + 5d² - d² - 2h, where d is the number of hours per day that he spends driving around, h is the average number of hours per day spent driving around by other people in his home town, and m is the amount of money he has left to spend on other stuff besides gasoline and auto repairs. Gas and auto repairs cost $1 per hour of driving. If each citizen believes that their own driving will not affect the amount of driving done by others, they will all drive D₁ hours per day. If all citizens drive to maximize the utility of a typical citizen, they will all drive D₂ hours per day, where

• A) D₁ = 5 and D₂ = 0.
• B) D₁ = D₂ = 2.
• C) D₁ = 2 and D₂ = 1.
• D) D₁ = 4 and D₂ = 2.
• E) D₁ = 2 and D₂ = 0.

---

Definitions:

Insurance Policy

A contract between an individual or entity and an insurance company, outlining coverage terms and conditions for specific risks.

Expected Value

The calculated average of all possible outcomes of a random variable, weighted by their probabilities.

Uncertain Income

Income that is not guaranteed and can fluctuate due to various factors such as business cycles, seasonal work, or freelancing.

Probability

The measure of the likelihood that an event will occur, expressed as a number between 0 and 1 where 1 indicates certainty.